America’s ‘sugar daddy’ just went broke — and you’re stuck with the bill

Japan’s 20-year government bond yields just hit their highest level since 1999. Their 30-year government bonds crossed 3.3% this week — an all-time high — up a full percentage point since spring. For Japan, that’s not a yield. That’s a scream.

Why should you care? Because Japan owns $1.2 trillion in U.S. government debt — more than your weird uncle owns in grievances — and when your biggest lender suddenly discovers it can make money at home, it tends to stop financing your lifestyle. It’s like your friend finally realizing he’s been picking up every bar bill since 1985.

The 40-year bar tab comes due

For four decades, America’s run an arrangement so sweet that nobody wanted to talk about it. Japan makes stuff. Americans buy it. It takes the dollars and loans them back to the U.S. by buying Treasury bonds. It’s like ordering pizza on your ex-wife’s credit card, and she uses the receipt to prove you still love her. It made no sense. It was perfect.

The deal worked because Japan had nowhere else to put its money. Its own bonds paid zero. Sometimes less than zero. You could literally stuff yen in your mattress and get a better return than Japanese government bonds. So Japan bought America’s.

But here’s the thing about impossible arrangements: They’re impossible.

Last June, I laid out why this had to end: Japan’s aging population needs those savings for retirement, not to subsidize American consumption. Japan’s government debt, at 235% of GDP, makes America’s fiscal situation look positively prudent. And politics in Japan were fracturing.

This week, all three forces converged in the manner of a bad family reunion.

The math just broke

For the first time since shoulder pads were fashionable, Japanese investors can make actual money at home.

Japan’s 10-year yield hit 1.77% this week, up seven-tenths of a percentage point from last year. That’s pathetic by U.S. standards, but, for the first time since shoulder pads were fashionable, Japanese investors can make actual money at home. When you can get paid without leaving your house, the overseas shopping spree ends.

More importantly, Japanese life-insurance companies — the big buyers of ultralong U.S. bonds — are done. They’re preparing for new economic value-based solvency regulations (ESR), which means they’re buying superlong Japanese bonds instead of American ones. They’re like your friend who finally paid off his student loans and has zero interest in borrowing more.

The Bank of Japan, simultaneously, is scaling back bond purchases, ending a two-decade experiment in financial voodoo. With Japanese rates rising and the Bank of Japan stepping back, there’s suddenly nobody left to buy bonds that nobody wants at prices nobody likes.

In the third quarter alone, Japanese investors sold a record $61.9 billion in U.S. Treasurys. That’s not portfolio rebalancing. That’s heading for the exits.

Wall Street finally catches on

For months, the market was too busy pricing AI stocks and parsing Elon Musk’s latest proclamation to notice Japan’s bond yields climbing.

This week, the lightbulb finally flickered on. Albert Edwards at Société Générale warned it could “trigger a global financial market Armageddon.” Analysts at Charles Schwab noted Japanese institutions “may repatriate money back home,” potentially sending U.S. yields higher and raising borrowing costs. Market analyst David Roche called it “the end of U.S. exceptionalism.”

What this means for your wallet

Americans have gotten used to cheap money. That era is over.

When the world’s biggest foreign Treasury holder starts selling, everyone’s borrowing costs rise. And we’re already seeing it.

Your adjustable-rate mortgage? It’s adjusting. Up. The average 30-year fixed mortgage rate has climbed to 6.8% from 6.1% at the start of the year. Your “safe” bond portfolio? Japanese institutional investors are pulling money out of U.S. Treasurys, which means bond prices fall and your conservative investments get riskier. Your credit-card rate? The average APR hit 23.37% in October — the highest on record — and it’s still climbing.

Higher Treasury yields mean higher borrowing costs for everyone: corporations, consumers, the government. Everyone. Companies pay more to borrow, so they hire less and fire more. The government pays more on its debt, leaving less for everything else. You pay more on your car loans and your credit cards.

Americans have gotten used to cheap money. Free money. Money so cheap that companies borrowed billions to buy back their own stock. Money so cheap that the government added $10 trillion to the debt and nobody blinked.

That era is over. Not because the Fed decided. Not because Congress discovered fiscal responsibility — still waiting on that one. But because America’s biggest lender discovered it doesn’t need us.

The bigger picture nobody wants to see

This isn’t just about Japan. It’s about the end of a 40-year subsidy of American prosperity.

This isn’t just about Japan. It’s about the end of a 40-year subsidy of American prosperity.

For decades, Americans have lived beyond their means while somebody else picked up the tab. Japan was the most reliable tab-picker-upper in history. Polite. Quiet. Never complained.

But here’s what changed: Japan’s government debt is unsustainable. Its population is older than the Rolling Stones’ fan base. Its bond yields are finally rising. And the Japanese have realized they can’t afford to fund our lifestyle while their own economy requires oxygen.

The post–Plaza Accord bargain, where Japan lent America back the money that Americans spent on Japanese exports, was built on temporary conditions that everyone pretended were permanent. Japan had massive trade surpluses and zero investment returns at home. The U.S. had massive deficits and unlimited demand for borrowing. Perfect symbiosis. Perfect delusion.

Now the conditions have changed. Japan needs fiscal stimulus, but bond markets won’t allow it. It needs its savings for domestic priorities. And for the first time in decades, keeping money at home makes mathematical sense.

No way out

Japan held a bond auction and nobody came.

This week, Japan held a bond auction, and nobody came. Ten-year government bond yields hit a 17-year high. The yen hit a 10-month low. That’s not a market hiccup. That’s a market saying, “No, thank you.”

Prime Minister Sanae Takaichi, in one of her first moves as leader, picked a fight with China over Taiwan. China’s response is hitting Japan’s economy hard: tourism boycott (25% of visitors), seafood ban, rare-earth threats, warships in disputed waters. It’s economic warfare with a side of humiliation.

So Japan needs money for defense, stimulus, currency support and debt service — all at once. But bond auctions are failing while China takes target practice with the Japanese economy. It’s like asking for a loan with your house on fire.

U.S. Treasury Secretary Scott Bessent is demanding Japan raise rates to strengthen the yen. Beautiful idea. Impossible math. Higher rates would make Japan’s debt-service costs unbearable. Some analysts predict a return to yield-curve control — with Japan printing money to buy its own bonds. That’s not monetary policy. That’s a Ponzi scheme with a central-bank logo.

The wallet connection: Investors worldwide borrow cheap yen to buy higher-yielding assets — stocks, bonds, real estate. It’s called the carry trade. When it works, everyone’s rich. When it doesn’t, everyone’s poor faster. The arithmetic has broken. Not in one direction — in four. With China now helping push.

What you need to do

Lock in fixed-rate debt now. If you’ve got an adjustable-rate mortgage, refinance it. If you’re thinking about buying a house, understand that rates are going up, not down. The 30-year fixed mortgage rate averaged 6.24% as of mid-November — up from the pandemic-era low of 2.65% in January 2021. Barring another crisis, experts say Americans won’t see mortgage rates in the 2%-to-3% range again for decades. The era of expensive money is starting.

Rebalance your portfolio. That traditional 60/40 stocks-and-bonds allocation worked when bonds provided both income and diversification. In 2022, when stocks and bonds fell together, the 60/40 portfolio dropped nearly 20% — its worst performance in living memory. That’s not diversification. That’s just losing money with extra steps. Financial strategists at BlackRock and Morgan Stanley, for example, now recommend replacing part of the bond allocation with alternatives — gold commodities, REITs or liquid alternative strategies that don’t move in lockstep with traditional assets.

Expect volatility. When the world’s largest creditor nation unwinds four decades of Treasury purchases, markets don’t adjust smoothly. In August 2024, when the carry trade last unwound, the S&P 500 dropped 3% in a single day. That was the preview. The feature film is coming.

The bottom line

In June, I told you there was something in the basement. This week, it came upstairs.

For 40 years, Japan’s money held up the floorboards of American prosperity. Americans built homes on their foundation, raised children on their credit, retired on their patience. Americans told themselves it would last forever because forever is easier to believe than next Tuesday.

But nothing lasts forever. Not even other people’s money.

Now the floorboards are creaking. You hear it at night when you check your mortgage rate. You feel it in the morning when you look at your 401(k). That sound you hear? That‘s not the house settling. That’s the house revealing it was never properly built.

The financial analysts who dismissed this in June are now using terms like “contagion” and “systemic risk.” Those are the words professionals use when the threat is real but they don’t want to cause panic. Markets are already pricing in structural changes to global capital flows.

Japan’s not angry. Japan’s not punishing. Japan’s just broke and old and tired of pretending that dollars it’ll never see again constitute wealth. The Japanese are going home. They’re taking their money with them. And the U.S. is standing in a house it can’t afford, built on a foundation that’s crumbling.

The party’s over. The lights are on. And you’re looking around the room and realizing you’re alone with the bill.